2023-11-29 12:00:57 ET
Summary
- TDOC's bottom line driver, BetterHelp, has shown troubling signs of declining memberships and profitability on a QoQ basis, with it remaining to be seen if this downtrend may persist.
- Its operating expenses continue to accelerate against the decelerating top-line as well, naturally delaying its path towards sustainable profitability.
- TDOC's Integrated Care segment shows improving metrics, but the future remains uncertain due to the intense market competition from well-capitalized tech/ retailer/ health-care giants.
- Combined with its eye-watering short interest of 12.74% at the time of writing, we are uncertain if there is any floor to this decline.
We previously covered Teladoc (TDOC) in September 2023, discussing the management's overly expensive Livongo acquisition, which had consistently underperformed the BetterHelp segment as the bottom line driver.
Despite the peak recessionary fears, the management had not reigned in costs, with its operating expenses still growing in line with its top line, resulting in our Hold rating, since we were not certain when the telemedicine company might achieve profitability.
In this article, we will be discussing its mixed prospects as TDOC's top and bottom line estimates continue to be downgraded through FY2027, with the stock also charting lower highs and lower lows since the February 2021 peaks.
Considering the stock's minimal near-to-long-term tailwinds, we maintain our Hold (Neutral) rating here.
The TDOC Investment Thesis Remains Speculative
For now, TDOC continues to report a decent top-line expansion to $660.24M ( +1.2% QoQ / +7.9% YoY) and expanding adj gross margins to 71.8% (+1 points QoQ/ +2.2 YoY) in FQ3'23.
Then again, this has been negated by the accelerating expenses to $532.77M (+2.2% QoQ/ +8.2% YoY), naturally triggering its underwhelming operating margins of -8.9% (+0.1 points QoQ/ +2 YoY).
TDOC's BetterHelp Metrics
In addition, it appears TDOC's bottom-line driver, BetterHelp, is facing tremendous headwinds as observed in the decline in its paying users to 459K (-17K QoQ/ -22K YoY) by the latest quarter.
This has directly contributed to the decline in the segment's top-line to $286M (-2% QoQ/ +7.9% YoY) and bottom line to $26M (-23.5% QoQ/ +136.3% YoY), with it remaining to be seen if this QoQ trend is temporal or the start of its downward spiral.
TDOC's Integrated Care Metrics
The only two bright spots to TDOC's execution thus far, is the improving metrics for the Integrated Care segment, with expanding revenues of $374M (+3.8% QoQ/ +9% YoY) and adj EBITDA of $63M (+65.7% QoQ/ +61.5% YoY) by the latest quarter.
Perhaps this is attributed to the segment's stable ARPU of $1.41 (inline QoQ/ +0.7% YoY) and expanding memberships to 90.2 (+4.3M QoQ/ +8.3M YoY).
The second one will be TDOC's consistent Free Cash Flow profitability of $99.81M (inline QoQ/ +68.6% YoY), underscoring its ability to operate at scale moving forward.
Perhaps this is why we are starting to see notable improvements in its balance sheet, with a moderating net debt of -$507.3M (+12.2% QoQ/ +21% YoY) by the latest quarter. This implies that the telemedicine company may survive through the next few years of consolidation in the primary care market.
For now, the competition is notably intensifying indeed, as more and more legacy players offer telemedicine/ integrated insurance/ chronic care services, with the list including UnitedHealth Group (UNH), CVS Health (CVS), and Walgreens Boots (WBA).
This is not even including those offered by highly capitalized tech companies/ retailers, such as Amazon Clinic (AMZN), Walmart Health Virtual Care (WMT), and Costco (COST), amongst others.
Until we know how things will unfold moving forward, it is unclear whether TDOC will be able to compete against these giants after all.
In addition, investors may want to note that $550M of its Livongo debts will be due by June 2025 and another $1B by June 2027.
Depending on the state of its balance sheet, we believe that the likelihood of another expensive refinancing may be on the table, with the management likely having to take on additional debt at elevated interest rates then, depending on when the Fed pivots.
TDOC Valuations
Perhaps this is why TDOC's FWD EV/ EBITDA valuation of 10.57x has been drastically moderated compared to its 1Y mean of 15.02x and 3Y pre-pandemic mean of 87.98x, finally nearing the sector median of 12.91x.
The Consensus Forward Estimates
This trend may have to do with TDOC's consistently downgraded bottom line prospects thus far, with the telemedicine company no longer expected to generate EPS profitability by FY2025 and now, prolonged through FY2027.
These sentiments are not overly bearish as well, due to the decelerating growth observed in its top-line and accelerating expenses as discussed above, worsened by the mixed performance posted by BetterHelp and intensifying market competition in the primary care segment.
So, Is TDOC Stock A Buy , Sell, or Hold?
TDOC 5Y Stock Price
These headwinds have naturally contributed to TDOC's impacted stock prices, with it currently retesting its critical support levels of $17s after losing -93.6% of its value since the February 2021 peak.
Combined with its eye-watering short interest of 12.74% at the time of writing, we are uncertain if there is any floor to this decline, since the volatility from aggressive short sellers may negate the potential upside from these bottom levels.
As a result of the potential volatility, we maintain our previous Hold (Neutral) rating on the TDOC stock, since those who remain are likely highly-convinced strong-fisted investors with higher risk tolerance.
For now, we prefer to adopt a wait and see attitude from the sidelines. There may be more pain in the near term.
For further details see:
Teladoc: No Floor Yet